How to get a lower rate on an auto loan

Jerry Edgerton

MoneyWatch

Oct 22, 2012 1:49 PM EDT

2013 Ford Fusion Close

iStockphoto

(MoneyWatch) Strong auto sales this year have been boosted by the growth of auto loans obtained through dealers, Edmunds.com is reporting. That's good news for the industry and the economy but means that as a car shopper you need to be careful not to overpay in high interest rates for your loan.

"Pent-up demand from consumers unable to get credit during the recession will continue to contribute to auto sales growth as these consumers get access to credit," says Edmunds chief economist Lacey Plache in a just-published report. The expansion of credit has included growth in loans to consumers with subprime credit ratings -- about one quarter of auto loans in the second quarter of this year.

But if you are fortunate enough not to be a subprime buyer, you still have other options beyond dealer financing. And even if you do wind up with a dealer loan, make sure you are not paying above-average rates.

Take these steps to make sure you are getting the best auto loan deal:

Know your credit score. Go to annualcreditreport.com and look over your report and take the one-time paid option to get your score. This is the key to what interest rate you will pay.

Check the average loan rate for your credit score. For instance, the Yahoo Autos financing page shows that prime borrowers with FICO scores above 720 are paying an average of just 3.75 percent. Scores between 690 and 719 have a 5.16 percent rate and borrowers between 660 and 689 pay 7.03 percent. These are broad averages, of course, but will give you a benchmark to see if the dealer-offered loan is a good deal.

Get outside financing if you possibly can. If you have a relatively strong credit score, you may be able to get pre-approval from your bank or credit union. With that financing in hand, you can compare a dealer financing offer and take it only if it is a better deal.

Keep each part of the transaction separate. Dealerships love "payment buyers" who focus only on the monthly payment. That lets them wrap all together the trade-in, if any, the price of the new car and the financing. Negotiate hard on the new-car price after checking on a typical selling price such as the Edmunds.com True Market Value.

With these precautions, you can upgrade your ride to something like the redesigned 2013 models Ford Fusion or Honda Accord without paying too much for your auto loan.